LSU Discussion # 2

This week we are learning about interest rates and valuation models for bonds and stocks. The underlying concept is all based on the time value of money: The “value” of a financial asset is the present value of all future cash flows. That present value is based on the “appropriate discount rate”, which is the required rate of return on the financial asset.

Changes in value of financial assets, and bonds in particular, is the topic for this discussion. The US Federal Reserve Board (the Fed) has increased interest rates, specifically the federal funds rate (the rate banks charge other banks, usually for overnight loans).

Fed interest rate today 2022-present: The Fed’s latest moves in an era of soaring inflation

Rate hikes 2022-present

Source: Fed’s board of governors

As you can see from the data above, interest rates increased by 5% between March 2022 and July 2023. With these changes, there was a ripple effect felt across the economy. The value of bond portfolios held by banks as well as individual investors dropped, the “cost” of borrowing money increased across the board from car loans to mortgage loans as well as business loans.

For your discussion this week, I’d like for you to pick a sector or topic and discuss the impact of the interest rate increases. Below are examples of directions you could take:

Personally (Never put personal info in the post that you are uncomfortable with!! Speak in generalities if you prefer, the point is to apply the interest rate change impacts to your post.

How have the interest rate changes impacted on your purchase decisions maybe it is to delay a major purchase (car or house maybe).

What about the buy vs. rent decision? There have been articles on how the relative economics have changed recently.

Have you modified investment allocations in your portfolio or IRA/401K investments?

Banking sector:

Pick a bank that has failed or was purchased by another bank because of problems with their bond portfolio or similar situation. What was the underlying problem at the bank? What was the outcome? Yes, a deeper discussion of SVB is acceptable here as long as you cite an additional outside credible source. The number of troubled banks is limited.

Corporate sector:

Pick a company that may have had to change their plans on raising funds because of required higher coupon rates. Maybe the company has experienced changes in its sales because consumers are holding off on spending.

Maybe discuss a firm that has had a hard time getting loans because of high rates.

There are a lot of different directions you can go with your post, but no matter what you choose (even personal) you MUST have at least one credible outside source (remember that Investopedia and Wikipedia are not considered reliable). As with any discussion, be sure to reread the grading rubric before posting.

Bottom line:

What aspect are you discussing? What changed, and why? How did decisions or outcomes change from what would have been expected without the interest rate increases? The “so what” is where I’m looking for. Go beyond “interest rates went up, bond prices went down”.